The telecommunications industry is just too diverse, too fast-changing, and too fragmented for any given trend to be given the label of industry-wide. Yet there is a warranty cost-cutting story to be told by many of the top equipment makers, who have reduced their warranty expenses year after year.

There are two big themes in the story of telecommunications equipment warranties, and we hope to detail them both this week in the form of charts. The first big theme is the disappearance of the borderlines between the various types of networks that span the industry. And by that we mean telephone companies getting into the cable TV business; the Internet carrying phone calls; Netflix streaming films through Xbox consoles; free Wi-Fi for smartphones in coffee shops, etc.

Basically, everybody's getting into everybody else's business. And while it used to make sense to speak of the phone and the TV separately, and not to even think about computer networks, nowadays one device can do all sorts of tricks across multiple networks, wired and wireless.

High Turnover Rate

The second big theme, which we suspect is closely related to the first, is the incredible pace of change -- not only in the technology, but also in the roster of manufacturers. The small players get acquired, and the big players go out of business.

Since 2003 we've been tracking roughly 170 different telecom equipment companies, reading their annual reports to tabulate their key warranty metrics: claims paid, accruals made, and reserves held. What we aim to do this week is to turn them into something meaningful to telecom equipment warranty professionals -- something they can compare their own metrics to and see if they're ahead or behind their peers.

In Figure 1, we've added up the claims payments over the last nine calendar years. And the reason we note that it's by calendar year is because so many of the companies involved have chosen to end their fiscal years on September 30 or some other date besides December 31. In those cases, we've mapped their quarter-by-quarter warranty expenses to the calendar, so we're always comparing apples to apples.

Note that we've further subdivided the claims data into four telecom equipment segments, by network type. The largest, at least at the current time, is the Internet/datacomm/LAN segment. And by that we mean the makers of equipment designed to connect computers and peripherals to data networks. The leading equipment providers we've assigned to this category include Cisco Systems Inc., Netgear Inc., and Juniper Networks Inc.

The more traditional and formerly the largest segment is what we're calling telephone/mobile. These are the manufacturers that sell equipment to not only the wireline and wireless phone companies, but also to end users. There is a lot of crossover for both this and the Internet segment with the computer vendors such as Apple and HP that we profiled in last week's newsletter, and there is also quite a bit of importing under way by the likes of Nokia, Samsung, and others. But here we're tracking only the U.S.-based vendors, such as Motorola Mobility Holdings Inc., Ciena Corp., and Plantronics Inc.

The broadcast and cable television segment is the entertainment end of the business. The actual TV and radio receivers are part of another industry segment -- and very little of that business is made in the U.S.A. But the equipment sold to the broadcasters and cable network operators, and in some cases the boxes that are given, leased or sold to their customers, are definitely warranted by U.S.-based companies. Leaders here include Polycom Inc., Broadcom Corp., and JDS Uniphase Corp.

And finally, our fourth segment is where all the satellite, microwave, radar, military communications, signal intelligence, and network security equipment goes. As can be seen in Figure 1, it's not all that large from a warranty point of view. But that's because there's a significant amount of crossover into consumer electronics with the GPS navigation gear, and into aerospace with the military and satellite gear. And that leaves only a handful of vendors such as Harris Corp., Comtech Telecommunications Corp., and ViaSat Inc. to fill out this segment.

Disappearing Boundaries

The thing is, it was a lot easier to divide up the industry by network types a decade or two ago. Back then, there was no YouTube, Hulu or Skype, and there was even a clear division between the dial tone network providers and the cellular operators. By the way, we've added all the PBX, voicemail and fax gear into the phone segment. The meter-reading and webcam gear goes into the data segment. All the closed circuit TV and audio/videoconferencing gear is in with the TV segment. And all the marine, police, and amateur radio gear is in with satellite and microwave.

The second big trend, as we mentioned, is the incredible turnover we've seen in just the last nine years. And to illustrate that trend, we've taken the data from Figure 1, and reworked it to show the "market share" of roughly a dozen top telecom equipment makers.

The problem is, only half of them made it to 2011. Nortel went out of business in 2009. Lucent and 3Com were acquired by Alcatel and Hewlett-Packard, respectively. Avaya went private in 2007. Motorola Solutions either forgot or decided against continuing the warranty expense reporting of its former parent. And UTStarcom Holdings Corp. relocated itself to Beijing, China.

The net effect of all this consolidation has been a concentration of the claims payments into fewer, larger warranty providers. Out of the $1.17 billion in claims paid in 2011 by all telecom equipment makers, fully 42% of the "market share" was held by Cisco in 2011. That's up from only 18% in 2006. Motorola Mobility, formerly the mobile devices division of Motorola Inc., accounted for 26% of the claims. And Netgear, which actually used to once be part of Nortel, accounted for nearly 5% of the claims.

The only still-reporting member of our top dozen to see its claims total fall in 2011 was Harris Corp. It paid out $56 million in calendar 2010, but only $21 million in 2011. And its claims rate as a percentage of sales has fallen back down to its usual range as well.

Accrual Totals Fall

In Figure 3, we've used the same four network segments to divide up the accruals made by the 170 companies over the past nine years. As with claims payments, the peak year was 2006 for the industry as a whole. But Internet equipment claims peaked before that year, and Internet accruals peaked afterwards. And at least in terms of accruals, 2010 turned out to be a false turn. At $1.25 billion, 2011's accrual total was the smallest annual sum seen since reporting began in 2003.

And then there are the warranty reserves. The year-ending balance doesn't always quite end up exactly what would be expected after adding new accruals and subtracting new claims payments. That's because there are foreign exchange fluctuations -- and telecom equipment is a very successful export market for U.S. companies -- as well as other corrections made when past estimates proved to be either too high or too low.

Warranty Reserves Rise

Still, as can be seen in Figure 4, there seems to have been a reversal in the slow-but-steady decline seen in warranty reserve balances. The trend was down from 2003 to 2007, with only the slightest increase ($88,000) seen in 2008. And then there was a big drop in the recession year of 2009. But in the past two years, the balance has risen each time.

We don't want to make much of this phenomenon. But it's interesting to note that even though both industry claims and accruals have hit new lows in 2011, warranty reserves are on the rebound.

So that's the status of the three major warranty metrics within the telecom equipment industry. However, we've also been compiling sales data for the past nine years, and when the dollar amounts for claims and accruals seen in Figures 1, 2 and 3 are compared to hardware revenue, we can see another set of trends in the rate at which companies are paying their warranty expenses.

Costs Versus Sales

This is perhaps the more important set of trends. This is where we can tell which companies and which types of network equipment have reduced their relative warranty costs, even as equipment prices fall and the pace of technological innovation accelerates.

As can be seen in Figure 5, the 170 equipment vendors overall have done an amazingly good job of reducing warranty costs over the past nine years. Back in 2003 to 2006, they spent anywhere from 1.4% to 1.8% of their hardware revenue on warranties. Now they've got it down below 1.2%. And that explains why the claims and accruals totals counted in Figures 1 and 3 have been so low recently: manufacturers are spending less per unit of revenue.

The four network-specific segments don't all follow that same script, however. The Internet/data network companies certainly did, as can be seen in Figure 6. So did the broadcast equipment companies in Figure 8. But the phone network companies in Figure 7 didn't see as much of a drop, and the satellite/microwave companies in Figure 9 actually saw rates rise.

Constant Downward Trend

Let's start with the 55 datacomm equipment makers that we've tracked in Figure 6. Both of the spikes in 2003 and 2004 were caused by Nortel. If we set those aside as vendor-specific anomalies, it's clear that the trend has been downwards for multiple years. However, there's a bit of an upturn that can be seen at the end of 2011, caused by a bit of an upturn for Cisco. Whether it's the beginning of a new trend or an aberration, only time will tell.

The 52 telephone and mobile phone equipment vendors whose averages are detailed in Figure 7 have usually kept their warranty costs on the low side. In fact, their average accrual rate touched two percent only once, and never exceeded that level. The big drop in the average claims rate seen in 2003 and 2004 was caused by Lucent. However, if we set that aside what we see is nine years of little or no change.

Is that a good thing? On the one hand, the most traditional sector of the business was consistently spending roughly 1.5% of its revenue on warranty work. On the other hand, they showed relatively little improvement.

The ideal combination of low warranty costs that fell over time can be found among the 40 or so makers of telecom equipment for TV and radio broadcasters and cable TV network operators. In Figure 8, we see a sector that started out in 2003 spending around 0.9% of revenue on warranty and ended 2011 spending around 0.4% of revenue.

One reason is probably because many of the top companies in this sector are more like semiconductor and printed circuit board suppliers, which we will cover in the coming weeks and which are known for their very low warranty costs. They're typically selling products to the cable TV and fiber-optic network operators, who are just as demanding a bunch of perfectionists as the telephone companies (or they are the telcos).

Broadcast Equipment

But another reason is that even the companies selling editing and production equipment to the entertainment-oriented broadcasters are also perfectionists. For instance, both Avid Technology Inc. and Chyron Corp. have kept their warranty costs below the industry average.

The satellite, microwave, and radar companies are the only group that wasn't better off in 2011 than they were in 2003 or 2004. Then again, as can be seen in Figure 9, they are a little bit better off than they were in 2008 and 2009. But their current average of roughly 1.2% is about the same as 2004 and 2005, and a bit above the levels of 2006 and 2007.

However, keep in mind that as was previously mentioned, this sector is somewhat hollowed-out because most of the top satellite equipment makers are counted in the aerospace industry. Most of the radar gear is for the military or government agencies. And most of the navigational device makers are in the consumer electronics space. So what's left behind are 23 companies that didn't fit into either of those two industry classifications.

Sales Increases

Overall, among the top 30 telecom equipment warranty providers of 2011, two-thirds saw sales increases year over year. For some, such as Ciena Corp., Symmetricom Inc., Netgear Inc., and Harmonic Inc., the sales increases were impressive -- upwards of 25%.

Only half of those 30 companies managed to cut their claims rates. But some -- Adtran Inc., Corning Inc., and Harris among them -- did so convincingly. Then again, at the other end, companies such as Extreme Networks Inc., General Cable Corp., and Powerwave Technologies Inc. saw their claims rates absolutely soar in 2011. So not all the news was good.

And that's the reason there's no clear trend in all these numbers. The telecom industry is just too diverse, and too fast-changing, and the warranty providers are too numerous, for any given trend to be widespread and prevalent.

Ninth Annual Product Warranty Reports

As we continue with our annual survey of U.S.-based warranty providers, here are the links to the online editions of all the other parts of this series:

• Ninth Annual Warranty Report, Totals & Averages
• Top 100 Warranty Providers of 2011
• Aerospace Warranties
• Automotive Warranty Report
• Computer & Disk Drive Warranties
• Telecom Equipment Warranties
• Medical & Scientific Equipment Warranties
• Semiconductor Warranties
• New Home Warranties
• Appliance & HVAC System Warranties
• Fixtures, Furniture & Building Material Warranties

Readers needing more detailed snapshots of individual companies in either a PowerPoint or Excel format are invited to view the list of charts and spreadsheets available on the Warranty Statistics page.